The impact of Covid-19 has led to a dramatic economic standstill in China. However, given its growth since the crisis in 2007-2008, Chinese consumers might play an important role in the country's economic comeback, shaped by three secular trends.
Indeed, the impression on the ground is that almost all the available resources were pulled to contain the spread of the lethal virus. As a result, the impact of quarantine and other control measures appeared in China’s industrial production and GDP data for the first quarter of 2020. Industrial output fell -8.4% year-on-year while GDP declined by -6.8% y/y.
Although exports had already been weak due to the US and China trade war, imports of key components of high tech products shrank and overall exports fell by -13.9% y/y in March. Both consumption and production plummeted as workers and consumers stayed home.
That said, relative to other major economic crises, such as the Asian Financial Crisis (AFC) in 1997-1999 and the Global Financial Crisis in 2007-2008, China's economy had become less dependent on external demand. Indeed, in 11 of the 16 quarters since 2015, consumption contributed more than 60% of GDP growth in China. As such, investors are keen to know the implications of Covid-19 on the consumer landscape.
China has the most mobile users and arguably more e-commerce activity than any other country in the world. Online sales growth has been robust and the e-commerce landscape has evolved rapidly in recent years. Having said that, the pandemic has significantly changed consumer behavior in China. As the country shifted to a "stay-at-home" economy, consumers ordered fewer restaurant deliveries and cooked more.
Sales of discretionary items fell while households bought more home cleaning and personal hygiene products. The increasing health consciousness among consumers has triggered a surge in health product demand.
For example, according to Alibaba, the online sales of vitamin supplements grew +29% y/y in the first three months since the onset of Covid-19. Out of which, the immunity functional products (vitamin, calcium, dietary fiber, etc.) delivered even stronger growth of +59% y/y.
Outlook: As the trend continues, we expect more health-related concepts to emerge that could stimulate demand for health-related services consumption in China.
The Chinese authorities notably slashed import tariffs, consumption tax and VAT in several rounds since mid-2015, with the aim to reshape China’s growth model from export-oriented to consumption-driven. This move led to decreased retail prices, narrowing the price gap with international brands in China and overseas.
Besides, as the US-China trade conflict started in mid-2018 leading to currency depreciation, we see slowing growth in Chinese outbound travel. In the wake of travel restrictions due to Covid-19, the repatriation of Chinese luxury spending accelerated.
Outlook: We expect the trend to remain in the coming years, as consumers find fewer incentives to shop abroad given narrowing price differentials.
According to the United Nations, the ageing population (over 60 years old) in China will increase from 12% (in 2010) to 38% by 2100. This compares with the numbers of 2020 in the US (23%), Korea (23%), UK (24%), France (27%), Germany (29%) and Japan (34%). This means that:
The demographic change suggests structural shifts China in terms of consumption patterns. However, the profile changes suggest that those above-60-year-old Chinese of the future may have stronger spending desire/power (more educated, urbanized, economically independent and health conscious) than the same age group for today.
Outlook: As income levels improve and demographics change, Chinese consumers are shifting their spending to more lifestyle and service-based categories, in our view. In general, consumers appear willing to upgrade and accept price increases in categories that improve the quality of life.
While Covid-19 has limited impact in this aspect, the financial uncertainties associated with the pandemic may slow personal consumption. As a result, the overall pace of "trading up" may be slower than previously expected.
Overall, we believe domestic consumption in China will play a more dominant role this time, when the economy recovers from troughs; and China is arguably better positioned to withstand external shocks.
Indeed, the importance of Chinese consumers to the economy has been made clear by the authorities, which suggests the focus of policy stimulus is no longer on infrastructure but rather on consumption.
Nevertheless, Covid-19 has left its mark on this sector of economy as well and the slow recovery seen in the service sector due to lockdowns and containment measures may still be a source of uncertainty for the upcoming months. As such, stabilizing the labour market, and hence domestic consumption, should be a top priority of policymakers in China.
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